Global bond markets are facing a fresh wave of selling pressure, as inflation that is cooling more slowly than expected and persistently high fiscal financing demands push the market to reassess the interest rate path, with expectations of "higher rates for longer" continuing to build.
On Thursday, September 24, according to Bloomberg, the Bloomberg Global Aggregate Treasury Index yield rose 8 basis points on Wednesday to 3.99%, just a step away from the 4% threshold, reaching a level rarely seen since 2007, with the single-day gain being the largest since May. Meanwhile, the U.S. five-year Treasury yield broke through 5% for the first time since 2007. Swap markets have now priced in three 25 basis point rate hikes over the next year, with expectations for a fourth hike also rising notably.
The impact of the bond market selloff is also transmitting to other assets and the real economy. Financing costs for governments, corporations, and households are facing upward pressure, and higher risk-free yields also raise the discount rate for risk assets such as equities, weighing on their valuations. At the same time, bond market volatility has risen markedly, with the ICE BofA MOVE Index climbing on Wednesday to its highest level since March, further increasing investor caution about entering the market.
Weak Five-Year Auction Demand, U.S. Treasury Yields Keep Climbing
U.S. Treasuries are the core driver of this round of global bond market adjustment. On Thursday, U.S. Treasury yields continued to rise, with the 10-year yield up 2 basis points to 5.14%, a new high since 2007, while the 30-year yield rose to its highest level since 2004.
The U.S. Treasury Department completed a $70 billion five-year note auction on Wednesday, with the awarded yield reaching its highest since 2006. By one measure used by Bloomberg, the auction ranked as the second-worst performance since records began in 2018, indicating that the market still demands additional compensation at higher yield levels. As U.S. debt approaches $40 trillion, steadily rising interest expenses are further amplifying market concerns about the fiscal situation.
Strategists at JPMorgan and KKR both expect U.S. Treasury yields to have further room to rise, citing energy-driven inflation, massive government borrowing, and the risk of further central bank tightening as the main driving factors. Bloomberg Markets Live strategist Alyce Andres said investors are selling Treasuries not because inflation credibility has collapsed, but because the real policy outlook and term premium still require greater concessions.
Selloff Spreads to Asia, Japanese Yields Hit 30-Year High
Bond market pressure further spread to Asian markets on Thursday. Australian three-year government bond yields jumped 14 basis points to 5.07%, the highest since May 2011; New Zealand two-year yields rose by as much as 17 basis points, approaching 4%.
Japanese markets reopened after a three-day holiday and quickly caught up with the global selloff, with the 10-year Japanese government bond yield rising to its highest level since 1996. Brandywine Global Investment Management portfolio manager Carol Lye said that whether pension funds, banks, or life insurers, local institutions still provide insufficient support demand for the Japanese government bond market.
The global bond market adjustment also reflects, to some extent, the market's repricing of the interest rate environment. According to Bloomberg index data, global government bonds have fallen by about 2.4% so far this year, compared with a gain of 6.8% in the same period last year, with pressure on the bond market clearly intensifying.
High Inflation and High Fiscal Demand Support High Yields, Investors Await Volatility to Cool
Market participants cited in the report believe this round of bond selling has some fundamental support. Pendal Group fund manager Amy Xie Patrick said inflation remains high and sticky in multiple economies, labor markets remain tight, and even with rising fuel and various commodity prices, the economy is still maintaining good growth. Against this backdrop, bond performance is consistent with current economic fundamentals.
Faced with persistent selling, investor strategies have diverged. Ericsenz Capital chief investment officer Damien Loh believes short-term bond valuations already appear cheap, but does not recommend immediately entering against the trend; for investors hoping to find opportunities in the selloff, he prefers curve steepening trades, such as 2-year/10-year or 5-year/30-year spread strategies, which he sees as offering a more reasonable risk-reward ratio.
TD Securities strategist Hans Mikkelsen noted that the current contradiction in the fixed income market is that investors want higher yields but do not want yields to continue rising rapidly. "They are afraid of catching a falling knife." Rising bond market volatility is becoming the main obstacle keeping potential buyers from entering.
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